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THE VALUE CHAIN FRAMEWORK

AND RURAL FINANCING

July 29-30, 2010


ApoView Hotel
Davao City

EMITERIO F. SANSON, JR.


Senior Banking & MF Specialist
KEY MESSAGES

• The Value Chain Framework is useful for


EXPANDING FINANCIAL services and for
DEVELOPING ENTERPRISES
• Value Chain Financing is NOT NEW. It helps to
fuel many enterprises
• FINANCIAL INSTITUTIONS can learn from and
engage more with value chain actors in order
to develop new products and reach new
markets
What is Value Chain?

• IS A SEQUENCE OF STEPS INVOLVED IN THE PROCESS OF


PRODUCTION TO MARKET DELIVERY OF A PRODUCT.

• VALUE CHAIN APPROACHES ARE A VEHICLE FOR LINKING SMALL


BUSINESSES TO MARKETS

• FULL RANGE OF ACTIVITIES REQUIRED TO BRING A PRODUCT (OR


SERVICE) FROM ITS CONCEPTION TO ITS END USE.

• INPUT SUPPLY – AGRI PRODUCTION – FIRST LEVEL HANDLING –


PROCESSORS – WHOLESALERS/DISTRIBUTORS – RETAILERS –
CONSUMERS.
What is VALUE CHAIN?
Global Retailers

National
Retailers

Exporters
BANKS
Wholesalers

Banks, Non- Processors/Traders


Bank Fincos

Producers

Banks,MFI,
NGOs,COOPs Input Suppliers
VALUE CHAIN CONCEPT

End Users/
Consumers
Human Infrastructure
Resources Marketing

Production
Services Capital

Inputs Equipment
In assessing financial markets…
The Enabling Environment Meso-Level

Financial Infrastructure

Micro-Level Retail Providers

Clients

E.g., Banks, MFIs, Insurers

e.g., Credit bureaus, Auditors, Tech Service Providers

e.g., Policy Legislation, Regulation, Supervision


In Assessing Markets with VCA

 DEMAND
• Focuses on most relevant financial services demanded because
they help targeted enterprises to take advantage of opportunities
for growth

 SUPPLY
• Identifies range of service providers, building on their records,
perspectives and relationships
VALUE CHAIN FINANCING - EXAMPLES

• TRADE CREDIT
 Loan between buyer and seller (grains & high value crops)
 Benefits (inputs and product sales, higher yields, bulk purchases,
future production as collateral)

• OUTGROWER SCHEME (CONTRACT FARMING/GROWING)


 Loan linked to purchase agreement (more secure product and
market)
 Benefits (Higher yields and quality, bulk purchases input/products,
contracts for collateral, loan, sales terms, and product specs)
Value Chain: Limits & Power Relationship

Limits CONTRACT
TRADE CREDIT
GROWING

• Monopoly/Unfair • Checked by • Checked by need


Pricing market info & for reliable
trader product
• Side-Selling competition • Less options due
(“pole-vaulting”) • Frequent, to closer
creating high monitoring by the
default risk Integrator
• Enabling
Environment • Enforceable
• Trust contracts
Value Chain Actors & Financial Institutions:
Their Relevance and Complementary Roles

VALUE CHAIN ACTORS FINANCIAL INSTITUTIONS


 Vertical transactions Horizontal transactions
 Make money on VC product Financial products
 Presence & depth of outreach Outreach Potential
 Terms, conditions & risk/cost Sound financial practices
management fit econ activity
 Working capital to small players Working capital to larger
players
FINANCIAL PATTERNS & POTENTIAL
DEMAND FOR FINANCE
VALUE CHAIN WITHIN CHAIN FINANCE FROM POTENTIAL
LEVEL FINANCE FINCOS DEMAND
RETAIL Receive Supplier Bank loan, coops, microloans
credit “5-6”
WHOLESALE/EX Offer supplier Bank loans; credit Commercial
PORT credit to line facility loans/credit line
retailers;Offer
contracts to
Processors
PROCESSING Contracts and Bank loans Med/LT
Advances for investment for
wholesalers; offer expansion
supplier finance
and technical
services
FINANCIAL PATTERNS & POTENTIAL
DEMAND FOR FINANCE (Con’t)

Value Chain Within Chain Finance Needed Potential


Level Finance Demand
PRODUCTION Supplier Finance Short term loan; Loan/Credit Line
from Processor & working capital
Input Distributor loan; Microfinance
INPUT Receive Supplier Working capital Short term loan
DISTRIBUTION Finance & Volume loan
Discounts from
Suppliers
INPUT SUPPLY Offer supplier Short term bank none
finance to input loans; credit
Distributors and facility
Large Producers
What Therefore are the Opportunities for
Microfinance?
Where are the opportunities for microfinance institutions for
financing within the value chain?

* Input Distribution ( financing the fertilizer/chemical


requirements of farmers)
* Production level (financing labor and other materials needed in
production)
* Processing (packaging materials, financing small tools and
equipments, etc)
* Trader/Wholesaler/Assembler/Consolidator (financing working
capital)
* Retail (financing micro business loan)
BANANA CHIPS CARDABA SUBSECTOR MAP

Local Retail Outlets Importers

Price
makers
Banana Chips Exporters
( about 15% of cardaba production)
MANILA
Price
EXPORTERS Makers,
Price takers; high med risk
risk; medium
Micro Processors proximity to First Fry Processors
Less than 5% of markets; few Processing their own
Cardaba production suppliers
production
TRADERS/
DISTRIBUTORS Source of info; Price
quality control at Makers,
Price makers but
community level; med risk;
shifts to price
Barangay has low degree of with some
takers when supply
Assembler influence at the options on
is very limited; low Agent community chain
risk; med proximity channels
to markets

CARDABA GROWERS/ TRADERS


Unripe banana
Good quality for processing
BANANA CARDABA: LOCAL MARKET

Supermarkets End Consumers


Banana Cue Vendors/ Food Est.
Price takers; low Supermarkets
Jumbo
risk; low
Sizes Only
proximity to
farmers

Wholesalers in Manila Public Manila Public Markets


Market Retailers

Source of info; quality control


Manila Price at community level; has Price
Distributors Makers, strong degree of influence at takers, Davao Public
low risk the community chain low risk Market Retailers

Manila Based Traders


Davao based
Distributors
Price takers;
high risk; Price makers;
medium Barangay med risk; with
proximity to Assembler
Traders several market
markets channel options

CARDABA GROWERS/ TRADERS


Fresh Cardaba, Manila Fresh Cardaba, Davao Route
Route